Commerical Paper

Question 1

What is the overall rule for commercial paper?

Answer 1

When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.

Question 2

What are the parties to a promissory note called?

Answer 2

Promise or is called the maker and the promisee is called the payee.

Question 3

What are the parties to a draft called?

Answer 3

Drawer gives the order.
Drawee is ordered to do the paying.
Payee is the beneficiary of the order.

Question 4

What is needed to qualify as a negotiable instrument rather than just a contract?

Answer 4

WOSSUPP

1) Writing
2) Order or bearer
3) Signed by the maker or drawer
4) Sum certain
5) Unconditional promise or order, and no additional promises or orders
6) Payable on demand or at a definite time
7) Payable in currency.

Question 5

The writing recites “I promise to pay if the Mets win the World Series.” is this a negotiable instrument?

Answer 5

No it’s a contract because it contains an express condition.

Question 6

The writing recites “This note is secured by a security interest in collateral described in a separate security agreement between payee and maker. Rights and duties with respect to the collateral are stated in the security agreement”. Is this a negotiable instrument?

Answer 6

Yes, although an instrument “governed by” or “subject to” the terms of some other agreement or stating rights or obligations with respect to the promise or order generally is a contract and not a negotiable instrument, merely referring to another writing containing tangential matters does not of itself make the promise or order conditional.

Question 7

The writing recites “I promise to pay from the funds I realize from my next
wheat crop” Is this a negotiable instrument?

Answer 7

Yes, the instrument will NOT be deemed conditional merely because it limits payment to a particular source or fund.

Question 8

The writing recites “I promise to pay $75,000 principal amount plus interest.” Is this a negotiable instrument?

Answer 8

Yes, when the instrument states that it
is payable with interest, but does not state how much interest, the judgment rate (the rate on a court judgment), which is set by state statute and therefore fixed, will be
applied.

Question 9

“I promise to pay by $5,000 or a Rolex watch,” Is this a negotiable instrument?

Answer 9

No because not payable in currency.

Question 10

“I promise to pay $5,000 and give you

my vintage Beatles album collection” Is this a negotiable instrument?

Answer 10

No because the writing contains additional promises aside from promise to pay money.

Question 11

“I promise to pay $5,000 On Feb. 1, 2011, but this becomes immediately due and payable if prior to that time the Redskins win the Super Bowl.” Is this a negotiable instrument?

Answer 11

Yes because considered payable at a definite time; acceleration clauses are permissible.

Question 12

“I promise to pay $5,000 Payable when my first grandchild is born” Is this a negotiable instrument?

Answer 12

No because this feature event is not linked to a date certain

Question 13

What words must the note or draft use to be considered payable to order?

Answer 13

Pay to Order of [name], Pay to assigns of [name]; Pay to [name].

Question 14

What words must the note or draft use to be considered payable to bearer?

Answer 14

Pay to bearer, Pay to the order of cash, Pay to cash, Pay to order of bearer, Pay to name of person or bearer.

Question 15

“Pay $5,000 to Andy Garcia”: Is this a negotiable instrument?

Answer 15

This instrument is lacking order or bearer language. Nevertheless, there’s a special rule for checks. A check not payable to order or to bearer is still negotiable. Here, it’s not a NI unless it is a check (draft), but not if it’s a note.

Question 16

What are the two ways that a defendant can get sued in a commercial paper fact pattern?

Answer 16

1. Signature liability

2. Warranty (transfer) liability

Question 17

Who may be sued for signature liability?

Answer 17

Maker of a note or drawer of draft that fails to pay as promised may be sued.

Indorser of a note or draft where the maker or drawer doesn’t make payment.

Question 18

What should a drawer or Indorser of a draft do to avoid signature liability?

Answer 18

Write the words “ without recourse” together with the signature.

Question 19

Who may be sued for breach of warranty?

Answer 19

Any transferor who sells the negotiable instrument. Thus, if our transferor is not a donor, he can be sued.

Question 20

Gwyneth indorses her paycheck from Paramount Studios and remits the check to her agent, for services rendered. Her agent in turn remits the check to Stylist for his services. The check bounces. May Stylist sue
Gwyneth?

Answer 20

Yes, warranties run with an indorsed instrument.

Question 21

What are the five warranties made by the transferor of a negotiable instrument?

Answer 21

Transferor

1. has good title to instrument
2. All signatures are genuine or authorized
3. Instrument is not materially altered
4. There is no defense or claim good against the transferor
5. Has no knowledge of any bankruptcy or insolvency action against the maker or drawer.

Question 22

Bobby Donnell indorses his paycheck by signing his name on the back and delivers it to Elinor, who loses it. Jimmy finds it and cashes it at Gullible Grocery. Is Gullible Grocery a holder?

Answer 22

Yes, because the indorsement was a “blank indorsement” (didn’t name a specific indorsee and was properly negotiated by delivery alone)

Question 23

Bobby Donnell indorses his paycheck, “Pay to Helen Gamble, /s/ Bobby Donnell.” Helen loses the check. Jimmy finds it, signs Helen’s name on the back and cashes it at Gullible Grocery. Is Gullible Grocery a holder?

Answer 23

No because Helen is an indorsee to this “special indorsement” and Helen ever indorsed the check gullible grocery couldn’t become a HDC.

Question 24

Bobby Donnell indorses his check, “For deposit only, Bobby Donnell.” Lucy steals the check from Bobby and cashes it at Stupid Bank. Is Bank a holder?

Answer 24

No, this is a “restrictive indorsement,” i.e. Contains a condition. Because bank didn’t pay attention to the restriction bank cannot be a HDC. Bobby has an action for conversion against the bank.

Question 25

How does one become a HDC?

Answer 25

Takes the instrument

1) for value (more than a mere promise)
2) in good faith; and
3) without notice that it is overdue or has been dishonored or is subject to any defense or claim

Question 26

Carrie indorses and delivers her paycheck to Aidan, to pay him for the furniture that he made for her last year. Is Aidan a HDC?

Answer 26

Yes, old value is good value.

Question 27

How does one meet the good faith requirement of becoming a HDC?

Answer 27

1) Good faith means honesty in fact (this is a subjective test); and
2) observance of reasonable commercial standards of fair dealing (objective test)

Question 28

Is the without notice requirement for a HDC objective or subjective?

Answer 28

Objective test asking to the holder know or have reason to know of the problem.

Question 29

What is encompassed in the requirement that the HDC take without notice that the instrument is overdue?

Answer 29

1. Purchasing instrument later than the date payable if

2. Principle in arrears, but okay if holder knows that interest payments are in arrears.

Question 30

What is encompassed in the requirement that the HDC take without notice of any claim or defense against the instrument’s enforcement?

Answer 30

1. Appearance gives notice (e.g., stamped paid or void)

2. Notice that obligation of any party is voidable

Question 31

Aidan sells a chair to Charlotte. He misrepresents to her that it is an antique. Charlotte signs and delivers to Aidan a negotiable note for $4,000 for the chair. Aidan indorses the note and sells the note to Samantha. Can Samantha qualify as a HDC?

Answer 31

As between Aidan and Charlotte, Charlotte’s
obligation to pay is voidable because Charlotte has a defense to enforcement of her promise to pay because Aidan defrauded Charlotte. Nevertheless Samantha could be a HDC if she did not have notice or reason to know of Charlotte’s defense.

Question 32

Larry steals a check payable to cash from Carrie and sells it to Dave. Carrie discovers the theft and confronts Dave. Who is entitled to the negotiable instrument?

Answer 32

Dave if the instrument was properly transferred and Dave didn’t have knowledge or reason to know of the theft.

Question 33

What is the shelter rule?

Answer 33

A transferee acquires whatever rights her transfer or had (“takes shelter” in status of transfer were) allowing transferee “to step into the shoes” of the HDC, even though
she otherwise clearly fails to meet the requirements of due course holding. Thus,
transferee has all the rights of an HDC even though transferee is a donee or otherwise fails to qualify.

Question 34

What is the benefit of HDC status?

Answer 34

A holder in due course (and subsequent transferees who take “shelter” in that status) takes the instrument free from claims, free from personal defenses, and subject only to real defenses.

Question 35

What does it mean we say an HDC takes free of claims?

Answer 35

A claim is a right to a negotiable instrument because of superior ownership. If a negotiable instrument is duly negotiated to a holder in due course, the holder in due course defeats the superior owner.

Question 36

What does it mean when we say an HDC takes free of personal defenses?

Answer 36

Every defense available in ordinary contract action such as unconscionability, waiver, estoppel, fraud in inducement

Question 37

What does it mean when we say an HDC takes subject to real defenses?

Answer 37

MAD FIFI4
M:aterial
Alteration
D:uresss

F:raud
I:n
F:actum
I:ncapacity
I:llegality
I:nfancy
I:nsolvency

Question 38

Maker writes a check for $100. Payee changes the amount to $2,100, then sells it to an HDC, who buys it in good faith for market value without knowledge of the change. Is HDC entitled to the $2,100 from the maker?

Answer 38

No, payee made a material alteration to the instrument which is a real defense and to which HDC is subject. However, if maker were negligent, he is estopped from raising material alteration as a defense.
Negligence includes leaving blanks or leaving wide spaces on the check.

Question 39

Frank Sinatra sells Ava Gardner a ring, telling her that it contains diamonds that date back to the 17th Century. After paying for the ring by check, Ava discovers that it is a fake. If the check is now held by an HDC, can Ava assert a defense?

Answer 39

This is fraud in the inducement (a personal defense) rather than fraud in the factum (a real defense). Therefore, defense cannot be asserted. Ava knew that she was signing a negotiable instrument.

Question 40

Does the death of the customer revoke the

bank’s authority to pay a check?

Answer 40

No, not until the bank knows of the death and has reasonable time to act on such knowledge.

Question 41

If drawer’s signature is forged, check is written for more money than original owner wrote it for, or payment is to incorrect payee who is liable?

Answer 41

Bank because bank must honor a check as drawn. But bank may hold the thief liable and the drawer if negligent by leaving blanks or spaces on the instrument or by failing to report within a reasonable time a forgery or alteration that appears in a bank statement.

Question 42

If an employee writes a check without authority, who is liable?

Answer 42

Employer if employee was entrusted with responsibility for handling checks.